Fundrise Review: Invest in Commercial Real Estate with Just $500

Whether it's old school real estate investment trusts (REITs) you can buy on the market or some of the many real estate crowdfunding platforms, passive investments in real estate is easier than ever.

One area that hasn't gotten as much attention in the crowdfunded world is commercial real estate.

Most REITs available on the market play in the commercial real estate world, which is hard to get into as an individual investor because property prices are so high, but with a REIT you get no flexibility. The REIT is like a mutual fund, you just buy and sell shares.

It's also subject to the whims of the stock market – which is something you're probably looking to avoid by investing in real estate!

What is Fundrise?

Fundrise is a crowdfunded real estate investing platform that was founded in 2012 by two brothers (Ben and Dan Miller) in Washington D.C. Their father, Herb Miller of Western Development Corporation, developed 20 million square feet of real estate in the Washington D.C. area. Fundrise's first project was a $325,000 raise from 175 investors (minimum of just $100) in the H Street NE Corridor in D.C.

Today, you don't invest directly in real estate but you instead invest in eREITs and eFunds. They are portfolios of private real estate located across the United States and focused on your investment goal. Some investments are designed for income, others are designed for equity growth, and the fund will be tailored to that goal in mind.

Crowdfunded real estate has gotten very popular lately because it allows you to diversify your risk. Fundrise is different from some other crowdfunded real estate marketplaces because you invest into funds, not directly into properties. This is also why you don't need to be an accredited investor since you're investing in a fund and not into a private placement.

As an investor, I think this is a difference without a distinction. It's still diversified even if it's not directly into properties.

What is an eREIT?

eREITs invest in commercial real estate only.

An eREIT is like a regular REIT except it's only available on Fundrise's platform. This makes it less affected by the market since it's not available on the open market. This also means they're less liquid because the market is smaller. With Fundrise, the eREITS are all in commercial real estate – so hotels, apartments, shopping centers, and office buildings. There aren't single-family homes or other residential properties, these are commercial real estate properties that generate income.

The eREITs acquire commercial assets and loans, look to add value and then collect cash flow from the interest payments, rents, and other profits from the commercial assets.

For the eREIT, you have no transaction fees since you're buying and selling directly on Fundrise. You pay a 0.85% annual asset management fee. (if you use the investment services and management system, that's an extra 0.15% annual investment advisory fee).

Finally, the minimum investment in an eREIT is only $500. You don't have to be an accredited investor, unlike with larger minimums on other platforms, because more like buying a mutual fund than a piece of a property.

What is an eFund?

eFunds invest in residential real estate development.

The eFund is similar to an eREIT except it's invested in residential real estate assets like single family homes, townhomes, and condominiums. It's structured as a partnership, rather than a corporation so you avoid any double taxation. Like the eREIT, it's only available directly from Fundrise itself so not subject to the whims of the stock market. The minimum on an eFund is $1,000 and you do not have to be an accredited investor to invest.

The way eFunds work is that they buy land for sale in various areas, develop it with residential homes, and then sell it for a profit.

As of November 2017, they were offering an Urban Housing Development eFund™ that would acquire properties in urban areas, develop and then sell them. The fund had a minimum investment of $1,000. The fees were the 0.85% annual asset management fee and you could expect both periodic distributions as well as distributions when assets were sold. There was a time horizon of five years.

What is Goal-Based Investing?

Fundrise lets you, as an investor, pick one of three goals:

Supplemental Income – Earn additional passive income, have a moderate-term investment horizon, and may be planning for retirement in the near future

Balanced Investing – Get general investing with max. diversification, have a moderate to long-term investment horizon, and may be newer to investing outside the stock market

Long Term Growth – Want to maximize returns over the life of the investment, have a long-term investment horizon, and are comfortable with more potential variability year to year

(there is a questionnaire if you aren't sure which type of investor you are)

For these plans, you simply pick one type, open an account, and deposit money. Fundrise handles the rest.

The Long-Term Growth Plan projects annual returns of 10.3-11.4% (about half as income, half as appreciation) and would put you in 38+ assets in a mixture of risk categories (they tell you exactly how much of your portfolio would be going where!).

Who Can Invest and How?

Any US resident over the age of 18 can become an investor on Fundrise. You do not have to be an accredited investor! (international investors cannot invest directly on Fundrise)

Fundrise currently supports personal and joint investment accounts as well as Trusts, LLCs, LPs, C and S corporations. If you want to invest with your IRA, you will have to set up an agreement with the Millennium Trust Company but it's possible.

Fundrise investments have performed well, but there are no guarantees

What are Fundrise Returns?

When it comes down to it, what matters are the returns you get from the various funds. They claim real estate investing returns of 8 – 11% per annum.

Two things to note from those returns.

From their disclosures, “Performance information is presented net of all management fees and expenses unless marked otherwise.” So it's a true 8 – 11% return and not 8 – 11% less management fees (there are no commissions), so it's a fair representation of what you will take home at the end of the day.

8% – 11% is a pretty wide range but it is well informed.

The low end is based on:

The weighted average of the annual interest rate of each debt asset plus,

The annual preferred return for each preferred equity asset plus,

The base case proejcte dannual return for each equity asset.

Then, it is discounted by ~15% to account for downside scenarios…

Then they take off 1% to account for the 0.15% annual advisory fee and 0.85% annual asset management fee.

The high end is based on: (this is the same as the low end)

The weighted average of the annual interest rate of each debt asset plus,

The annual preferred return for each preferred equity asset plus,

The base case proejcte dannual return for each equity asset.

Then, it is discounted by ~2.5% to account for downside scenarios…

Then they take off 1% to account for the 0.15% annual advisory fee and 0.85% annual asset management fee.

So the difference is in the discounting. But it's a pretty robust calculation that takes into account many of the factors.

What are the Pros and Cons?

The Pros are pretty straightforward – you get involved in commercial real estate investing (with eREITs) without having to pitch in a large up front investment, you don't need to be accredited, and the fees are reasonable at 0.85%. You don't have to analyze individual investments, which I personally know I'm going to be bad at, but you just have to pick an approach.

Another pro, and this is a rare guarantee in the investing world, is that they offer a 90-day satisfaction guarantee. If you are unhappy at any time during the first 90 days, they will buy back your original investment at the original amount. I say rare because I've never heard of a guarantee like this.

What are some cons? It's real estate investing so it's going to force you into long-term investing (which is good for investing unless you face a financial pinch and need to access those assets) and redeeming your shares must follow a schedule. You have a 60-day waiting period after submitting your redemption request, then you get liquidity on a monthly basis. It's not like selling a stock and getting the proceeds almost immediately.

The true competitor to Fundrise is a low-cost REIT like what you'd get at Vanguard. The Vanguard REIT ETF (VNQ) has an expense ratio of 0.12% (this is on top of what the REITs charge). The difference is that Fundrise is looking to find opportunities that are too small for public-traded REITs (what VNQ invests in) but bigger than what individuals might be able to do on a regular basis.

Fundrise Alternatives

Fundrise is hardly the only game in town. In the last few years, there has been an explosion in the number of companies offering investment opportunities like these. Many are copycats but there are a few that have differentiated themselves.

If you are an accredited investor, one of the bigger companies is RealtyShares. RealtyShares and other similar crowdfunding real estate investing sites let you invest in individual properties rather than funds. This gives you the flexibility to pick and choose what you invest in while maintaining a smaller holding (think a few thousand, rather than tens of thousands). You can read our full review of RealtyShares to learn more about them.

If you are not an accredited investor, your options are a little more limited. You can look into traditional REITs, like those at Vanguard. You can also consider RealtyMogul, which deals in REITs and has a $1,000 minimum. It's difficult to see how these companies differ from one another, other than strictly based on deal flow, but these options are out there.

Real estate investing is a lucrative area to diversify your investment holdings and one of these options should be on your menu.

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About Jim Wang

Jim Wang is a thirty-something father of two who has been featured in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.

He can show you the philosophies, tools, strategies and methods he used to become financially independent and free to pursue what was important.

One of his favorite tools is Personal Capital, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you're on track to retire when you want. It's free.

He is also diversifying his investment portfolio by adding a little bit of real estate. But not rental homes, because he doesn't want a second job, it's diversified small investments in a mix of properties through RealtyShares (Fundrise if you're not an accredited investor). Worth a look and he's already made investments that have performed according to plan.

Disclaimer

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